Earnings Working Against SMS Lifesciences India Limited's (NSE:SMSLIFE) Share Price Following 25% Dive

SMS Lifesciences India Limited (NSE:SMSLIFE) shareholders won't be pleased to see that the share price has had a very rough month, dropping 25% and undoing the prior period's positive performance. Of course, over the longer-term many would still wish they owned shares as the stock's price has soared 123% in the last twelve months.

Following the heavy fall in price, SMS Lifesciences India may be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 19.6x, since almost half of all companies in India have P/E ratios greater than 33x and even P/E's higher than 62x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

With earnings growth that's exceedingly strong of late, SMS Lifesciences India has been doing very well. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

View our latest analysis for SMS Lifesciences India

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on SMS Lifesciences India's earnings, revenue and cash flow.

Is There Any Growth For SMS Lifesciences India?

The only time you'd be truly comfortable seeing a P/E as low as SMS Lifesciences India's is when the company's growth is on track to lag the market.

If we review the last year of earnings growth, the company posted a terrific increase of 169%. EPS has also lifted 22% in aggregate from three years ago, mostly thanks to the last 12 months of growth. So we can start by confirming that the company has actually done a good job of growing earnings over that time.

Comparing that to the market, which is predicted to deliver 26% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.

With this information, we can see why SMS Lifesciences India is trading at a P/E lower than the market. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.

The Final Word

SMS Lifesciences India's recently weak share price has pulled its P/E below most other companies. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As we suspected, our examination of SMS Lifesciences India revealed its three-year earnings trends are contributing to its low P/E, given they look worse than current market expectations. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

It is also worth noting that we have found 3 warning signs for SMS Lifesciences India (2 shouldn't be ignored!) that you need to take into consideration.

Of course, you might also be able to find a better stock than SMS Lifesciences India. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.